It's a fascinating story that
all started with General Motors commissioning a study on
executive pay from McKinsey consultant Arch Patton. He found that
from 1939 to 1950, hourly employee pay more than doubled, but top
management pay went up only 35%.

The study, published in the Harvard Business Review, became a
series and turned national attention toward executive
compensation, promoting the idea that higher pay and bonuses were
the lever to attract and retain top executives.

Patton became
a superstar, hired by managers who were not surprisingly
interested in hearing they were underpaid. McKinsey's CEO
apparently thought this type of consulting was beneath the firm,
but wasn't about to turn down the money.

"For several years, Mr. Patton
personally accounted for almost 10 percent of the firm’s
billings,"
McDonald writes. "At the end of the war, only 18 percent of
companies in the country had bonus plans. By 1960, about 60
percent of them did."

In 1961 came the books
"Men, Money and Motivation: Executive Compensation as an
Instrument of Leadership" and "What Is an Executive
Worth?"

One McKinsey consultant
told McDonald that Patton wrote "the same article [26]
times for the Harvard Business Review."

Because of its
popularity and McKinsey's influence, the idea became an
entrenched philosophy, as did the concept that as a company
grows, so should CEO pay.

While Patton's
compensation philosophy started with rigorous analysis of
performance, soon it took on a life of its own, with executive
pay spiraling higher and higher, while worker pay was left to
languish.

The AFL-CIO puts the number even higher, saying that the average
Fortune 500 CEO makes 354 times the average wage of their
employees. Some executives make 1,000
times more.

Of course,
McKinsey and Patton weren't the only factor. Bull markets and
economic expansion help push pay upwards and encourage investors
to look the other way — and once it moves up, pay is slow to move
back down. Meanwhile, slack labor markets and weak
growth prospects help to explain
stagnant wages.

Regardless, McKinsey and Patton may have been a major driver in
the gap between CEO and employee wages
exploding by
a factor of 10 since the middle of the
century.